SEBI taps stock exchange for RIA supervision

SEBI has a new found focus on Registered Investment Advisers (RIAs).

The latest one is Administration and Supervision of Investment Advisers via a circular issued on August 6, SEBI.

In simple words, SEBI has decided to recognize a wholly-owned subsidiary (WOS) of the stock exchange (stock exchange subsidiary) to administer and supervise RIAs registered with SEBI.

What will be the responsibilities of the subsidiary?

The WOS of a stock exchange will have following responsibilities:

1. Supervision of RIAs including both on-site and offsite
2. Grievance redressal of clients and RIAs
3. Administrative action including issuing warning and referring to SEBI for enforcement action
4. Monitoring activities of RIAs by obtaining periodical report
5. Submission of periodical reports to SEBI
6. Maintenance of database of RIAs

This looks like SEBI is going to delegate its work of supervision of Investment Advisers to the recognized subsidiary of stock exchange.

What’s happening with RIAs?

SEBI is clearly working in the direction of administration and supervision for RIAs.

Earlier in the month of July 2020, SEBI issued amendments to the RIA regulations.

In the amendments, SEBI had mentioned that –

1. The audit report has to be submitted to SEBI
2. Compliance and monitoring process for client segregation will be in accordance with the guidelines specified by SEBI.

And now, SEBI has taken the step in forming an SRO for RIAs through the WOS of Stock Exchange.

Yes, SEBI had also floated a consultation paper in April 2019 for setting up of Self-Regulatory Organisation (SRO) for regulating RIAs. Click here to view the consultation paper.

Now, SEBI has taken action on the same.

In the said consultation paper, SEBI had proposed definition of SRO as an organization of intermediaries or an entity promoted by a stock exchange, as may be recognized by the Board.

Going by the definition of SRO, the WOS of stock exchange will be considered on lines of SRO.

As mentioned in the consultation paper on SRO, the WOS will have a regulatory role, Grievance Redressal & Dispute Resolution role as well as Disciplinary role towards RIA.

This will strengthen the conduct of RIA.

The responsibilities mentioned for the subsidiary especially monitoring activities of IAs by obtaining periodical reports and grievance redressal of clients and IAs looks like a good step in this direction.

Delegating of work to WOS by SEBI should make the process for registration of RIA faster and help in proper compliance of IA regulations.

However, what is not clear is whether IAs have to pay membership to become members of such SRO. If yes, this will be an additional cost burden.

Or, will the WOS act like a mediator between IAs and SEBI?

We have to wait and watch.

---

Here is the criteria for grant of recognition:

Although the supervision work will be done by the WOS of stock exchange, the eligibility criteria is for the stock exchange to fulfil:

1. Minimum 15 years of existence
2. Minimum Networth of INR 200 crores
3. Should have nation-wide terminals
4. Should have Investor grievance redressal mechanism including Arbitration
5. Should have the capacity for investor service management gauged through reach of Investor Service Centers (ISCs) in at least 20 cities

Additional requirements for WOS:

1. The subsidiary has to put in place systems/process for grievance redressal, administrative action against RIAs, governing RIAs, maintaining data, sharing of information with SEBI etc.
2. The subsidiary should have the necessary infrastructure like adequate office space, equipment and manpower to effectively discharge the responsibilities.

The stock exchange can either form a subsidiary or designate an existing subsidiary for the purpose of regulating RIAs.

The stock exchanges, fulfilling the criteria, have to submit the detailed proposal incorporating requisite systems and mechanism to discharge responsibilities, to SEBI within 30 days from the date of the said circular . Click here to view the circular.